Father sold land to Son for $150,000 in 2012.Father's basis in the land was $60,000.Son paid Father $25,000 and gave Father a note for $125,000 due in 2015.In 2013, Son sold the land for $200,000 cash.The note bore interest at the appropriate Federal rate and both Father and Son held the land as an investment.

Question

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Father's basis in the land was $60,000, and he sold the land to his Son for $150,000, resulting in a gain of $90,000. However, since Son paid Father $25,000 and gave him a note for $125,000, Father's gain must be reported using the installment method. In 2012, Father reports $75,000 of gain ($25,000 received in cash plus $50,000 from the note). In 2013, when Son sold the land for $200,000 cash, Father must recognize the entire remaining gain of $15,000 ($125,000 note balance minus $110,000 adjusted basis). This gain is long-term capital gain since Father held the land for more than one year.

Father Sold Land to Son for $150,000 in 2012